SECTION 861 STRUCTURES COME UNDER FIRE

SECTION 861 STRUCTURES COME UNDER FIRE

January 01, 1999

Lee Sheppard urged the government, in an article in late December in Tax Notes magazine, to attack so-called 861 structures that many US companies are using to burn off “overall foreign losses.” The structures make the companies better able to use foreign tax credits. They involve debt loops where cash is circled among related parties. Sheppard argues that the government has authority to ignore the debt and to invoke partnership “anti-abuse regulations” to deny favorable US results from inserting partnerships in the ownership chain. Tax Notes is widely read at the IRS and by the staffs of the tax-writing committees in Congress. Sheppard is a contributing editor of the magazine.

THE IRS IS EXPECTED TO SHUT DOWN LILO TRANSACTIONS BY FEBRUARY . . . LILOs are a form of lease financing where a foreign company or US municipality leases rail cars or a power plant to a US equity and then subleases it back. The acronym stands for lease-in-lease-out. A senior Treasury official characterized the transactions in December as little more “than the US Treasury paying a foreign person a rebate on the price of some asset.”

“CHECK-THE-BOX” rules will be tightened further.

These rules let US taxpayers classify foreign subsidiaries as corporations, partnerships or “disregarded entities” simply by mailing a form to the IRS. Donald C. Lubick, the assistant Treasury secretary for tax policy, said in December, “We are now considering a series of transactions facilitated by check-the-box that we never foresaw nor intended, and that may give rise to results inconsistent with the purposes of the statutes they seek to exploit. We are currently determining how best to address them.”

LOOK FOR GUIDANCE LATER THIS YEAR on the US tax treatment of international telecoms income. US Treasury officials are wrestling with a host of issues. A project is expected to appear on the IRS business plan for 1999.

“SOLID WASTE” may be redefined for tax purposes. The definition is important because power plants that use solid waste for fuel qualify for tax-exempt financing and special depreciation allowances. “Solid waste” is defined currently as “useless, unused, unwanted, or discarded solid material which has no market or other value at the place where it is located.”

The recycling industry is concerned that corrugated cardboard that recyclers purchase for different prices, depending on whether the cardboard is picked up at a loading dock or a collection system, may not qualify as waste. It wants the IRS to permit material to qualify as waste if its only value derives from demand for the material from recyclers or, alternatively, if it can be shown through general studies of the local waste stream that the material would otherwise end up in a landfill or incinerator.

Treasury officials have not decided yet whether to put the issue on the 1999 business plan.

Keith Martin